• Welcome to AppraisersForum.com, the premier online  community for the discussion of real estate appraisal. Register a free account to be able to post and unlock additional forums and features.

Reliability of sale-leasebacks as comps

Status
Not open for further replies.

Vernon Martin

Thread Starter
Senior Member
Joined
Jun 8, 2005
Professional Status
Certified General Appraiser
State
California
Recognizing that sale-leaseback transactions are not necessarily representative of market value, as their pricing is based on the negotiated lease payments, it has always been my thinking that a sale-leaseback transaction wouldn't be too much higher than market value because the buyer wouldn't want to be stuck overpaying for the real estate if the tenant defaults.

I'm reviewing an appraisal (for a lender) of 8 rural gas stations in Kentucky in which the buyer plans to lease back the stations to the seller. The buyer has already purchased other stations from the same seller (for sale-leaseback) at prices significantly above any independent comps, and these same-buyer comps have been used as comps. These small town service stations/convenience stores, miles from any freeway, were purchased at prices of $1 million to $1.5 million.

These prices seem so much higher than other rural service stations in KY and Indiana that I wonder if there is a scam at work here. Has anyone seen something like this before?

VM
 

PL1957

Senior Member
Joined
Jul 19, 2004
Professional Status
Certified General Appraiser
State
Illinois
I don't think it's a scam - it's just an alternate method of financing for the occupant of the property. They get "x" number of dollars based on a payback over "y" number of years. The x/y are based on the company's credit, property characteristics and the risk appetite of the buyer.

Upon resale (or finance) it becomes a leased fee problem where the answer is largely dependant on the credit of the tenant. Often in sale/leaseback situations, we see lenders ask for the leased fee value along with some version of a "go dark" value, which assumes the tenant vacates. How they structure a loan after that depends on their underwriting standards.
 

Vernon Martin

Thread Starter
Senior Member
Joined
Jun 8, 2005
Professional Status
Certified General Appraiser
State
California
Perhaps "scam" is too harsh a word. I think the way the current deal and previous deals were structured misled the appraiser into thinking that all were market value transactions. I found the portfolio of properties also listed for $7,500,000, yet the purchase contract is for $8.8 million. That's what made me think that the purchase contract may be deceptive.

In situations like that, it makes me wonder if the buyer and seller have secretly negotiated a lower purchase price and the inflated contract price may serve to fool the appraiser and lender. It certainly fooled the appraiser. Perhaps this allows the buyer to acquire the portfolio for no money down, and maybe the seller is getting more cash out of it, too.

As for the five sale-leaseback comps from the buyer, only one of them checked out in my phone calls to the respective county clerks. Three other transactions occurred at only half the stated price, and one transaction never happened.

Like I told you last week, PL, this is rather typical of the deals submitted by mortgage brokers to my hard money clients.
 

PL1957

Senior Member
Joined
Jul 19, 2004
Professional Status
Certified General Appraiser
State
Illinois
Perhaps "scam" is too harsh a word. I think the way the current deal and previous deals were structured misled the appraiser into thinking that all were market value transactions. I found the portfolio of properties also listed for $7,500,000, yet the purchase contract is for $8.8 million. That's what made me think that the purchase contract may be deceptive.
Now that's something the appraiser should have found as part of his sales history search, assuming the availability of this information through the normal course of business. It certainly should have raised questions.
In situations like that, it makes me wonder if the buyer and seller have secretly negotiated a lower purchase price and the inflated contract price may serve to fool the appraiser and lender. It certainly fooled the appraiser. Perhaps this allows the buyer to acquire the portfolio for no money down, and maybe the seller is getting more cash out of it, too.
A false contract presented to the appraiser certainly crosses the "scam" line. It is pure and simple mortgage fraud.
As for the five sale-leaseback comps from the buyer, only one of them checked out in my phone calls to the respective county clerks. Three other transactions occurred at only half the stated price, and one transaction never happened.
With sales of c-stores and other property types that have significant non-realty components, I've found that public records rarely have the full story. Depending on the needs of the buyer/seller, the allocation between real estate and non-realty components can vary widely. Deals can be structured as acquisitions of companies, which can mean that nothing real estate related gets recorded at all. I don't think you can rely on public record without additional confirmation.
Like I told you last week, PL, this is rather typical of the deals submitted by mortgage brokers to my hard money clients.
Hard money deals are a whole different world that "typical" lending. Client requirements are different, and, as we discussed, the perception is that the borrower is lying about virtually everything.
 
Status
Not open for further replies.
Find a Real Estate Appraiser - Enter Zip Code

Copyright © 2000-, AppraisersForum.com, All Rights Reserved
AppraisersForum.com is proudly hosted by the folks at
AppraiserSites.com
Top

AdBlock Detected

We get it, advertisements are annoying!

Sure, ad-blocking software does a great job at blocking ads, but it also blocks useful features of our website. For the best site experience please disable your AdBlocker.

I've Disabled AdBlock
No Thanks